Yes it's a silly and unlikely scenario but I've had some employers who are very bad at tax stuff. I can only imagine what they'd be like if they had a contract in place that could potentially hold someone else liable for their inaction and incompetence.

If they left it for long enough the fines and penalties could add up. If such an extreme example were to arise could the employee take the view that he'd be financially better off simply to pull out of the agreement and pay the 5k back. Then would he no longer be liable to pay the 7k tax bill?

Could the employee argue that the employer was being unreasonable and that they did not mitigate their losses by allowing the bill to spiral so out of control?

How could you go about persuading an employer that it might not be worth trying to enforce the Indemnity? What could you say to convince him that it wouldn't be in his interests to enforce the Indemnity?